The new EU Directive on Liability for Defective Products (the “New PLD”), will replace the existing EU Product Liability Directive (the “Existing PLD”) and will take effect on 9 December 2026. This will result in a substantial change in the EU product liability landscape as it has existed for the last 40 years.
The New PLD will affect UK-based manufacturers (including manufacturers of component parts), importers and authorised representatives (where manufacturers are outside the EU), software developers and AI providers (including for standalone apps, AI systems and “firmware”) and in certain cases, online platforms supplying into the EU market.
Policyholders who may not have fallen within the scope of the Existing PLD – especially technology product-based businesses, should consider the adequacy of their insurance coverage for potential third-party product liability exposure ahead of their next insurance renewal. This article focuses on the most relevant policies for coverage of these products-related risks, and considers how policyholders can prepare effectively for the increased risks introduced by the New PLD.
Our October 2024 alert summarises key updates that the New PLD will make to the EU product liability landscape and identifies the increased scope of liabilities facing companies. Ultimately, the New PLD represents an increased risk in product liability litigation for companies whose software falls within the scope of the New PLD. Policies likely to respond to such risks include:
- Product Liability: These policies provide indemnity for legal liabilities including death, personal injury, or property damage caused by a defective product. Policyholders should obtain an expanded definition of “Product” that complies with the New PLD, for example to expressly include software and related services such as software updates and components within products. Data itself constitute a product under the New PLD if provided in the delivery of a service or if integrated and used for manufacturing. Other policy definitions, including “Loss” and “Damage” will also need to be reviewed to ensure the scope of the coverage is sufficiently broad to cover the increased level of risk and liabilities resulting from the New PLD.
- Corporate General Liability: Such policies will be unlikely to provide sufficient coverage for ESG-related risks arising from the New PLD. The potential for liability linked to software failures/defects could engage a broad range of ESG liabilities, e.g. linked to product lifespan and sustainability requirements. In the context of social rights claims, the New PLD’s expansion to include medically recognised psychological harm caused by defective products will be particularly relevant for tech companies involved in the development of software/apps.
- Cyber Liability: Cyber risk or technology errors and omissions policies may be the best fit for defective software risks. These policies can cover certain first-party losses to the insured business, such as business interruption resulting from defective software, and the costs for IT and forensic accountancy experts. Third-party liability is also covered by these policies. However, as the cyber insurance market and policies continue to develop, risks arising out of the New PLD may not necessarily fit neatly within the language of cyber policies. The cyber insurance market has seen an increase in terms of market capacity and new insurer entrants, with lower premiums being available to policyholders. However, as the market has developed, so too have the exclusions, inserted into policies. Policyholders should pay particular attention to any exclusions to cover, to ensure there are no significant gaps in coverage.
- Professional Indemnity and Professional Liability (including Corporate Entity Liability): Professional indemnity and professional liability policies (D&O for claims against directors and officers) including corporate entity coverage (e.g. for shareholder claims against the corporate) can provide invaluable cover for third party claims, for regulatory or other official investigations and/or claims alleging “wrongful” acts or omissions in carrying out “Professional Services”. The definition of “Damages” will need to be broadened beyond purely financial loss to encompass the wider scope of damages available under the New PLD, such as for property damage and bodily injury, including medically recognised and medically certified damage to psychological health, which is expressly recognised as recoverable damage under the New PLD. The definition of “Professional Services” should also be reviewed to ensure the term “Products” mirrors as closely as possible the meaning of “products” under the New PLD.
- Public Liability: These policies protect businesses against claims made by third parties (such as customers, suppliers or members of the public) resulting from death, accidental injury or property damage caused by the policyholder’s business operations.
- Product Recall: These policies offer first and third-party cover to protect a business from financial/business interruption loss and reputational damage when its products are recalled or withdrawn from the market because of product defects. Cover is distinct from that offered by product liability policies, as product recall policies focus on costs of prevention and mitigation of harms.
- Directors’ and Officers’ Liability: These policies protect senior management against financial losses and provide legal defence costs cover in respect of third party claims made against them/implicating them in connection with alleged wrongful acts, errors or omissions in the performance of their duties. The scope of increased exposure resulting from the New PLD means that the scope of cover, including limits of Defence Costs cover, should be carefully revised under these policies.
Policyholders should also consider the following for all policy lines:
- Increasing policy limits of liability, including for defence costs coverage: The New PLD shifts the burden of proof, such that product defect and/or the causal link between the defect and damage may now be presumed, placing the onus on the defendant to rebut any presumptions. This could result in increased claims and increased spend for businesses on legal defence costs.
- Extending policy periods/“run off” coverage: The New PLD extends the liability long-stop period for latent injuries from 10 to 25 years. Policyholders may now be subject to longer-tail exposure so need to ensure their insurance coverage is sufficient considering the extended period of liability.
- Ensuring amended or new policies dovetail with existing policies: This is to ensure there is no overlap and no gaps in coverage. Policyholders should conduct comprehensive insurance programme reviews to assess whether their suite of policies cover relevant risks without duplication of cover and ensuring no gaps in coverage exist.
The New PLD means that corporate policyholders may face additional exposures, and over time, may see an increase in claims based on the more claimant/consumer-friendly Directive. Policyholders should work with their brokers to ensure their coverage programme provides enhanced cover to mitigate against increased risk, and to reduce the risks of gaps in coverage.
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